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The Fed Was ‘America First’ Long Before Trump

Rising interest rates, which he says he doesn't like, are a reflection of a strong economy. He loves to take credit for the latter and frequently boasts about how great things are since he came to office. One begets the other.

America isn’t being penalized for doing well, as Trump complained in a tweet Friday aimed at the Federal Reserve.That plays to his core supporters’ sense of grievance, but it ignores economic reality. The gradual, consistent and thoroughly telegraphed increases in borrowing costs are precisely because the economy is doing well.

Same with the dollar, another strain of imagined wrong emanating from the Oval Office these days. If the American economy outperforms those overseas and the Fed raises rates more often and further than the others, then that tends to strengthen the dollar. Central bankers don’t plot against presidents; their enemy is policy that leads to a poorer U.S. economy. Is Trump really asking for that?

There's more than the Fed at work here. Trump inherited an economic expansion that was already among the longest on record and may well become the longest. Trump and the Republican-controlled Congress gave the economy a late-cycle caffeine hit with tax cuts. Tariffs, everything else being equal, tend to be inflationary. Again, interest rates go up.

To disavow higher interest rates and a stronger dollar is to disavow himself and the people he appointed.

It’s a pity he’s taken on the Fed. No matter its flaws, it’s an institution staffed by adults who believe deeply in public service. Trump's nominees to the Fed board have all been sound and wouldn’t look out of place as Hillary Clinton nominees. Until this week, he’s left the Fed alone. That was the right approach. It still is.

Let’s look at what the Fed has done. Nobody can credibly claim to be surprised or disappointed. It’s been raising rates gently since 2015, recently in quarter-point steps every three months, each of them very well telegraphed. Even so, at the present setting of 1.75 percent to 2 percent, the benchmark federal funds rate is low by historical standards.

Most other central banks are pulling back on the stimulus, but not as much as the Fed. But it’s mostly a difference of degree, rather than kind. America’s economy is stronger than most and is further along the path of recovery from 2008 and its aftermath.

Interest rates are going up in the U.K. and Canada. The European Central Bank, which manages the euro zone, is wrapping up the bond buying that’s kept interest rates near zero. The ECB is still a long way from raising its benchmark rate. Japan is continuing with its quantitative easing because its struggle to generate enough inflation is the most challenging.

Is the European Union manipulating the euro, as Trump claims? If he is referring to quantitative easing by the ECB, he may have a point. Then again, the Fed did it first. The ECB hasn’t directly intervened in the foreign-exchange market for years and has only done so in times of emergency — and often in conjunction with the U.S.

China is a different game. Despite strides toward greater flexibility, the currency is heavily managed by the People’s Bank of China. As I wrote July 3, little happens with the yuan that authorities don’t tolerate or directly authorize. Trump is on firmer ground here.

Still, Trump needs to accept a bit of blame. China’s economy is softening, exacerbated by trade conflict, so the PBOC is comfortable letting the yuan drop. There may be more to come. Bloomberg Economics estimates the yuan may still be about 6 percent overvalued. It has lost 4 percent in the past month.

There is more going on in China than its clashes with Trump. The government has been trying to wean state enterprises and big banks off debt, which is slowing growth. Economic reports for June demonstrated a succinct weakening of activity. Soft landings are hard and it’s not inconceivable China stops trying to thread the needle and goes for an open-slather easing. In theory, that would mean the yuan weakens against the dollar.

Trump has to decide what he wants: Low interest rates or a strong economy. His first step? Recognizing there is a choice to be made.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss writes and edits articles on economics for Bloomberg Opinion. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.